BEIJING - Once China's industrial
heartland, the country's northeast region has
turned into a "rust belt" populated by moribund
state-owned enterprises (SOEs) and legions of
laid-off workers. The first week of September, as
part of the government's ambitious plan to
rejuvenate the region, the vice-premiers of five
northeast Asian countries and representatives from
52 Global 500 multinational companies met in
Changchun, the capital of the northeast's Jilin
province, to discuss how foreign investment and
cooperation might help get the region back on its
feet.

The inaugural northeast Asia
Investment and Trade Expo, which ran September
2-6, featured big-name participants like General
Motors, Siemens, Royal Dutch-Shell and Wal-Mart.
For Jilin's provincial government, it was the
latest attempt to kick-start local redevelopment
after the failure of a scheme in the 1990s to turn
the Tumen River, which also
washes the banks of North Korea and Russia, into
an international transport, trade and industry
hub.

Designated a "priority project" by
the United Nations Development Programme (UNDP) 10
years ago, the Tumen River scheme was earmarked
for US$30 billion of infrastructure investment.
But lack of interest from Russia, North Korea and
China's central government scuppered the plan. Now
that China's leadership has launched a concerted
attempt to revitalize the entire northeast region,
the UNDP is considering reviving the project.

The latest scheme to revitalize the
northeast, launched with much fanfare by Premier
of the State Council, Wen Jiabao, at the end of
2003, embodies a mix of motives. Politically, it
represents the Hu Jintao-Wen Jiabao regime's
effort to stake out a power base distinct from
that of the Shanghai clique that dominated China
through former leaders Jiang Zemin and Zhu Rongji
and their respective patronage networks. Over the
past two years, the top levels of the region's
provincial governments have been staffed with Hu
and Wen loyalists.

Economically and
socially, the strategy is a central government
attempt to pull a failing region up by the scruff
of its neck. Once the bastion of China's planned
economy, the northeast has slipped behind the
surging economies of the coast, especially the
greater Shanghai region and the Pearl River Delta
area around Hong Kong. The region was the worst
casualty of the decay of state industry in the
1980s and 1990s, and suffered tremendously under
the drastic restructuring of state-owned
enterprises initiated by Zhu Rongji in 1997.

The northeast endured nearly a quarter of
the 30-40 million lay-offs of SOE employees, and
has been the epicenter of worker protests.
According to Song Xiaowu, the deputy director of
the government office responsible for coordinating
the revitalization strategy, the highest
proportion of petitioners who come to Beijing to
vent their frustrations are from the northeast.
"If the northeast had remained stable," he admits,
"we would not have had to take such care of it
now."

The northeast revitalization scheme
is the second explicit regional development
launched in recent years, following the "Develop
the West" project that started in 2000. While the
campaign in China's poor West focuses on massive
infrastructure spending - around $75 billion to
date - the broad goals of the northeast project
are structural: industrial diversification,
further state-sector reform, and encouragement of
the stunted private sector.

The government
hopes it can soak up the legions of unemployed
workers by creating a dynamo to match the growth
engines of Guangdong and Shanghai. According to
Song, the main numeric target is simply to reduce
the region's unemployment rate to the national
average. Although official figures put the
unemployment rate in the northeast at 7%, this
does not take into account the thousands of
workers who remain contractually tied to their
work units - xiagang or "off-post" - while
remaining effectively out of work. Local officials
and academics agree that real unemployment is
somewhere between 10 and 15%.

The region
is piloting a social security reform that puts
xiagang workers directly onto unemployment
benefits, relieving SOEs of their remaining
financial liabilities to excess workers. This has
pleased employees and will help to make
unemployment figures more transparent, but many
workers have reacted angrily to losing their
xiagang allowance. Song says furious oil workers
from Daqing, China's largest oilfield, forced
their employer to pay severance packages of
Rmb100,000 (around US$12,000) per worker as
compensation.

The Daqing oil workers were
lucky: oil companies have the funds to placate
rioting employees. In fact, the oil industry
accounted for more than 80% of industrial profits
in the northeast last year. Unfortunately, the
northeast's oil fields are mature. Oil output from
Daqing fell below 50 million tons in 2003 for the
first time since production began in 1960, and
continues to decline. Not only is the region too
reliant on the state sector, it remains vulnerably
reliant on a handful of industries - oil, steel,
autos, and coal - both for profits and employment.

The northeast needs to diversify its
industrial base and create new labor-intensive
jobs in private businesses. Although the
government talks about creating jobs in the
private sector, state planners continue to rescue
capital-intensive, heavy industries from
bankruptcy. According to a recent World Bank
report, the financial condition of locally
controlled SOEs in the region worsened
substantially over the past few years. Rather than
letting zombie enterprises die, however, the
government is lending a helping hand by allowing
northeast enterprises to buy capital goods without
paying VAT.

The government cannot afford
to lay off more workers, but vast over-employment
in unprofitable industrial sectors by bankrupt
SOEs suggests further layoffs are inevitable. A
handful of major SOEs, such as Harbin's power
equipment company, are already internationally
competitive; others, notably Angang Iron and
Steel, are showing signs of renewed life. But, for
the rest, it is a matter of finding a merciful way
of putting them out of their misery so that the
private sector find space to bloom.

How
well
the revitalization scheme serves Jilin ( ATol map), the
worst-performing and poorest province in the
northeast, remains to be seen. Lacking a
coastline, oil profits or any significant private
sector, Jilin has struggled more than its
neighbors since China started reforming 25 years
ago. In Changchun itself, nearly 80% of economic
output is generated by just one giant SOE, First
Auto Works, which has its own car assembly and
component plants as well as joint ventures with
Volkswagen and Toyota.

Zhu Yejing,
Changchun's mayor, admits that Jilin's performance
in terms of developing private enterprise has been
"rather slow". But he is optimistic that the drive
to revitalize the northeast is beginning to bear
fruit. Five years ago it would have been
impossible to attract so many multinationals to
the city. "This is a chance not to be missed," he
says. "I think it's even fair to say it is our
last chance."

Tom Miller is the
Beijing correspondent of the China Economic Quarterly
(CEQ), a magazine that reports on the
Chinese economy and business environment. He can
be contacted at tpxmiller@gmail.com.